Bitcoin had lost nearly half its value since the April peak before finally seeing a small bounceback this past week, taking many of its investors on a tough ride. But some might have had an even bumpier ride than others, depending on how they are invested in the digital currency.
While many investors directly hold Bitcoin through their PayPal or Robinhood accounts, others have been seeking ways to ride along without hassles of securing and storing it. Investors can do so through Bitcoin funds, which allows them to trade the cryptocurrency more cheaply and integrate it into portfolios alongside stocks and bonds.
But crypto funds come in different shapes, and in a volatile market like today’s, they can bring risks beyond Bitcoin’s already fickle movements. Here are the different approaches:
Direct Bitcoin Holdings in ETFs
The most desired vehicle would be a Bitcoin ETF, an open-end, exchange-traded fund, backed by actual Bitcoin holdings in secure custody. An ETF can create and redeem shares freely according to investor demand. That means the fund can accurately track the price of its underlying assets without influence from the supply and demand for the fund itself. Investors won’t have to bid up the share prices when there is strong buying, or see shares plunge below the Bitcoin price when more people are selling. A Bitcoin ETF would also be very liquid, with shares traded on primary exchanges free most of the time.
As good as it sounds, there is currently no Bitcoin ETF in the U.S. Although a dozen of asset managers have submitted their application with the Securities and Exchange Commission and the public seems eager, the regulatory agency is still cautious about the digital assets’ high volatility and potential risk of manipulation. Six Bitcoin ETF applications are currently under the SEC’s official review, including one from funds behemoth Fidelity, with roughly 10 more pending.
But U.S. investors can get a glimpse of how Bitcoin ETFs work by looking at Canada. The Ontario Securities Commission has approved a few Bitcoin and Ethereum ETFs earlier this year, and this month’s crypto meltdown has proved that the ETFs can work just as they are supposed to.
As the price of Bitcoin cratered, the C$875 million
ETF (ticker: BTCC. Canada)––the largest in size among its Canadian rivals——moved nearly in lockstep. The fund has also seen very minor outflows despite a nose dive in Bitcoin’s price. From the cryptocurrency’s peak on May 8 to Wednesday, the Purpose Bitcoin ETF had asset outflows of only C$27 million——a small drop relative to the fund’s size. This means most ETF shareholders are likely long-term Bitcoin believers that don’t easily flinch at short-term volatilities.
Closed-End Bitcoin Funds With Price Gaps
For now, U.S. investors can go only for the second option: the closed-end Bitcoin fund whose shares can’t be freely created and redeemed…